Why You Don't Save For Retirement

Some shocking statistics recently caught my eye. The median IRA balance is just $55,000, and the median 401(k) balance is just $15,000. Baby boomers are working longer, since most do not have enough saved to retire comfortably. And, given the statistics, it’s likely you are in the same boat.

Why is it that so few of us save enough for retirement? Why are we so woefully underprepared?

I usually search for answers for these thought-provoking questions in marketing books. Often I find that lack of good marketing is underneath a lot of personal finance problems. Car manufacturers are great at showing off the sleek curves of their latest model, but “retirement” typically doesn’t have flashy commercials. But is it really that simple?

While reading the book Made to Stick recently, I came across an interesting principle: concreteness. The authors, Chip Heath and Dan Heath, describe it as one of the features necessary to make an idea stick in your mind. They cite an example of The Nature Conservancy, a nonprofit organization dedicated to preserving land. When they touted how many acres of land they wanted to save, people simply weren’t interested. But when they showed a particular piece of land they wanted to save, and named it “Mount Hamilton Wilderness” (after a local mountain), people flocked to help them.

Why is this? Our brains aren’t wired to have a tangible picture of “1,000 acres”, but they are wired to understand “Mount Hamilton Wildnerness.” Making something tangible — giving us the picture in our minds — makes it meaningful.

How does this relate to retirement?

One huge factor in why we don’t save for retirement might simply be that we lack a visual anchor in our minds for the word “retirement.” In other words, if I ask you to define “retirement”, you probably won’t have a quick answer. You may visualize some old person fishing or sipping a Mai-Tai on the beach, but you probably won’t relate that to yourself.

But if I ask you to define “watermelon”, you can probably visualize not only the fruit itself, but one or more times where you’ve eaten it, smelled it, or seen it.

How do you avoid the trap of buying tangible objects such as houses and cars instead of saving for retirement and investing? You start by making the things you desire tangible.

Making Retirement Tangible

There is probably something you spend $5 a day on that you could do without. A daily coffee; a Coke or two from the vending machine; a lunch out instead of brown-bagging it; premium cable TV and video games. Whatever it is, no matter how silly–write it down. Chances are you can easily visualize whatever it is. You can probably remember the last time you used it (especially since it probably hasn’t been that long ago!)

$5 a day, invested at an 8% annual return for 30 years, is over $228,000. (It’s actually even more than that, since you’re investing daily or monthly instead of annually.)

The problem is that’s where most personal finance authors stop. They show you a latte vs. $228,000 and expect you to be in awe. They expect that you will do the logical thing and cut out the latte.

Since Starbucks is still in business, that obviously doesn’t work.

Why don’t you pick the money? Simple: $228,000 is not tangible. It doesn’t have meaning or value to you. Those lattes hold an emotional significance and a value to you, but $228,000 does not.

Our next step, then, is to make $228,000 actually worth something to you.

What $228,000 is worth to you will be different for every person. Let’s assume for now that you plan to retire with your newly found $228,000. (By the way, if you plan to retire in 40 years instead of 30, that $228,000 becomes nearly $535,000!)

Now that you have visualized the video games, coffee, movies, or whatever you’re spending money on now, the next thing to do is visualize what you want out of retirement. So you have your $228,000 (or $535,000.) What are you going to do with it?

If you write down some lame one-word answer like “fishing”, by the way, I will kick you.

Visualizing Your Retirement

How about this retirement option? “For my retirement, I’m going to sell some of my possessions, take 4 years and travel the world. During those 4 years, I plan to see Paris and buy a designer dress, go to Switzerland and ski the Alps, and head to Australia and try a vegemite sandwich. I’ll save some money by living cheaply, and I will learn to speak at least one other language.”

Or this? “I plan to move to Mexico and rent a gorgeous beach house. I will enjoy living in a community with multi-cultural folks who love a warm, sunny climate. I’ll learn how to wrap a burrito so the stuff inside it doesn’t fall out, and I will teach music–particularly piano–to others to make a little pocket change.”

What’s happening here? Suddenly, your retirement is becoming real. If you do this right (look at travel magazines and talk to others for ideas), you’ll feel a shift in your thinking. Suddenly that latte doesn’t seem appealing…not when your dream is put off another day into the future!

Want to seal the deal? Find a picture or two that you feel represents your future retirement and place them where you will see them every day. If you feel so inclined, write something inspirational on the pictures. Maybe you can even think of a catchy saying to remind yourself of what’s really important. What about “A Coke a day keeps my retirement at bay?”

Most of us haven’t even taken a few minutes to think about what we really want out of retirement. No wonder, then, that nearly 50% of us choose to cash out our 401(k)s instead of rolling them over. It’s not just about how much money you will need to retire and when you can afford to retire; it’s about making retirement tangible. Real. Beautiful, even.

On Buying a House

This same line of thinking helps us understand why people buy a house, even at their own financial peril. Even when they know that renting and investing the difference could make them a millionaire, they still choose to buy.

Why? Simple: “Investing” isn’t tangible. Neither is “a million dollars.” (You can’t picture “a million dollars” as easily as you can a watermelon.) But a house is tangible. You can see it, walk around in it, live in it. I could just have easily named this article “Why Most People Buy A House Instead of Becoming a Millionaire.”

If you have a spouse or significant other who is interested in buying a house — or there is even part of you that desires it — numbers probably won’t change your mind. But what if you consciously decide to rent for less money every month and invest the difference? Remember to make it tangible. “If we choose to rent our current place instead of buying a house, we can afford to go on a vacation to Europe this year.” Maybe you can retire five years earlier than if you owned a house. (But remember to plan out exactly what you’re going to do once you do retire!)

Once you add in property taxes, home maintenance, water, garbage, and HOA or Mello Roos fees, renting a home typically comes out ahead. In fact, a recent study showed that middle-age renters in 2004 were more wealthy than the equivalent homeowners. Use this to your advantage and enjoy your rich life!

Take a few minutes now to sketch out and visualize your dream retirement. Discuss your plans with your spouse or significant other. Make it as tangible as possible. Maybe you can even start working toward it in other ways (learning the language of a country you want to live in, for instance, or planning a small trip to a potential place to live.) The more real you make it, the more likely you will be to save for it.

And remember: An indulgence today will lead your retirement astray!

Recommended Reading:

Made to Stick. If you are selling a product, or if you are interested in why certain stories and commercials seem to stick in your head better than others, this is the book. Well worth reading.

I personally can’t imagine myself “retiring” in the traditional sense of the word. The idea of saving a lump of money for when I am old just doesn’t appeal to me.

I have always imagined myself taking several mini-retirements throughout my life. Work hard for a few years, make some cash, then take time off and enjoy my family while I am still able.

Excellent article as always Erica!

http://www.atlasgloveshop.co.uk Erica Papdi

I completely agree, the thought of saving and scrimping for a time when I am too old an possilby unfit to enjoy traveling has always sounds very depressing to me. I’m all for living life now and enjoying doing whatever it is you like to do until I drop. The thought of work, work, work for 45 years and then…..nothing to do? I’d prefer 3 month sabaticals here and there myself as well.

Amanda

I don’t agree with renting a home. Buying is investing. Unless you’re subtracting the equity you build from the numbers you came up with for the taxes, HOA, etc, I think you come out behind. If you rent, when you retire, you get to A. Buy a house or B. Continue to rent. If you invested in a home, you no longer have a payment. I have a 15 year loan, when I am 45 I will own my home. No more payment, THAT I will invest.

Graham

I am interested to learn more about why you say renting is better then buying. Great article.

http://lauraroeder.com Laura

I think there’s a huge flaw in your argument here which actually proves your original point – when I hear $228,000 I immediately think that is nowhere CLOSE to being enough to retire. So the argument backfires – I’d rather have a coffee if that isn’t going to be nearly enough to retire anyway.

I actually think your premise is right-on BUT it’s hard because in reality you do have to put major money away to retire, $5/day ain’t gonna cut it.

http://www.erica.biz/ ericabiz

Some great comments on this post! Travis, that’s definitely a popular option these days — I just did a mini-retirement — but I still recommend visualizing and making it concrete. Also, visualizing when you’re going to do it is key, so time doesn’t get away from you. Discuss this with your spouse, as well.

Don’t forget, too, that you may be forced to retire early due to an injury or illness. Getting enough life and disability insurance will help, but it’s also important to have some money saved in case that happens — especially in the case of you being the primary breadwinner for a family.

It’s only better to own if the total costs, including mortgage, property taxes, insurance AND 1% of the price per year for maintenance, TOTAL, are less than the equivalent rent cost. And even then, only if you plan to stay in the house for at least 5 years.

Laura: Interesting point. This post touches on one reason why people don’t choose to retire; there are others, such as the reason you point out: it seems overwhelming to most people.

Most personal finance experts say putting 10-15% of your income away is the best thing to do. I would say do that AND do this. The thing is, though, with $228,000 saved up, you’ll have more than most do in 30 years. Sad but true.

-Erica

http://www.timjahn.com/blog Tim Jahn

To me, the idea of retirement implies that you’ve been wasting 40 years doing something that you can’t wait to “retire” from. Retirement is the light at the end of the tunnel.

If that’s the case, you should probably find a different tunnel. Maybe one with more light.

http://broadthinking.wordpress.com/ Ashley Doran

Erica,
Great post (and the first one I’ve read on your blog -which I’ve dutifully added to my Google Reader).

Reminds me of what my CPA said years ago: “If you actually use the square footage of your home – really use it – and plan on staying put for 5+years, it’s worth the plunge.”

Lots to think about though. Don’t mind telling you I have “Daughter Guilt” over a Christmas gift from my parents – the never ending Starbucks gift card. I wonder if they would be willing to finance my retirement as opposed to my caffeine addiction.

http://webbindustries.com Douglas Webb

Erica, in your latte example you’re comparing the present value of the cash flow (a tasty latte) against the future value of the cash flow ($228587.59 with daily compounding.) That’s a false comparison though; you’re not accounting for inflation and the lower value of those dollars 30 years from now.

Assuming 5% annual inflation (probably too low) in 30 years your $228587.59 is going to be worth the same as $52890.01 is today: not nearly enough for most people to retire on for very long. So, is it worth giving up nearly 11 thousand tasty lattes just to go broke soon after retiring? Not really.

Every little bit helps, of course, but like everything else to do with money, it takes a serious commitment to get serious results. At $22/day, after 30 years at 8% you’ll have just over a million dollars in the bank, worth about the same as $224K today. That will go a lot further than the $53K of value you’ll have saved at $5/day. If nothing else, it’ll buy you a very nice retirement home in most of the country, which you’ll need if you’ve been renting all of your life…

Doug.

http://paintandink.etsy.com Alison Whittington

While I completely agree that it’s amazing that $5 a day can become so much money over time, I also think it is crucial to enjoy life in the moment, and if, for some people, that means a deluxe coffee, while for other people, it means a video game or a weekly movie instead of Netflix, then I don’t think those are frivolous indulgences. The key is to actually enjoy those little indulgences, and be aware that you are enjoying them. To live in the moment. (While it’s certainly true that many people could be forced to retire much sooner than expected, it’s also true that any one of us could die much sooner than expected.)

I am not trying to put down saving for retirement in any way, and I don’t think “living in the moment” means a complete lack of planning for the future. It means not living for the future at the expense of now (pun only slightly intended). Because time is something you can never get back.

mjukr

I think Douglas and Alison make good points. Reminds me of the Robert Heinlein quote: “$100 placed at 7 percent interest compounded quarterly for 200 years will increase to more than $100,000,000 – by which time it will be worth nothing.”

Chris

Where, on this earth, can an average person be able to make 8% annually on their savings in a low enough risk environment to guarantee that return for 30 years?? Industry propaganda, pure and simple. It doesn’t exist. This is why most retirement advice is total bullshit, and is just used to sell financial products.

Perhaps the rare astute investor acan do it, but as advice for society in general, it doesnt wash. Most people will live on rents, or social security, when they retire. Nothing more.

http://www.livinginvol.com $$

As a lot of people have pointed out in this article the coffee point isn’t going to cut it for retirement. Still, I have analyzed exactly how much not spending money on coffee and saving for retirement will net you taking into account inflation (also including the cost of the coffee itself going up) and a decrease in risk tolerance for investments as we get older. This will provide a much more accurate number than the 228k mentioned about which is beyond realistic.

Thanks for this post, Erica. I just started reading your stuff lately, and as an avid personal finance book junkie, I felt this was a good post to respond to.

Without thinking about or redoing a bunch of math…I’d like to respond by considering the changes in the economy lately.

I’m especially concerned about where we are all headed if we continue to invest our money in the stock market and retirement plans that only invest in mutual funds. I know it’s a lot of “what if’s”, but what-if the dollar becomes worth ZERO?

My husband and I are currently looking at taking money out of our 401(k) and investing into more rental real estate, gold, business ventures or other things where the value won’t be zero when the dollar is worthless.

Yes, I am considering the tax consequences. I’m wondering if it’s better to pay a penalty for early withdrawal, or to lose the whole thing entirely?

“The New Rules of Money” by Robert Kiyosaki is very enlightening book on the topic of where our economy may be headed. I highly recommend it.

http://www.youtube.com/user/Escalon206 Krystal Magee

Renting is NOT better than buying!!! To rent costs more almost AlWAYS unless you want to rent an efficiency apartment for years.Let’s see, a house with a mortgage of $800.00 a month would most likely be rented for $1,100 a month. The landlord isn’t into renting out real estate for his own amusement, he’s into it for profit. Another reason some people forgo investing sooo much into retirement is everyone hears the horror stories. I know more people who have invested for YEARS only to lose half, if not ALL of the money they have “invested” for retirement than people who have come out on top.In my opinion middle class families are better off paying off our mortgages, any debt, and then saving our money SAFELY.Not in risky stocks that rarely have an 8 percent return. That’s being oh so generous and optimistic in my opinion.After reading a multitude of these posts I am pleased that other people find this article extremely unrealistic.